Friday, November 4, 2016

The U.S. Supreme Court and Tax Cases

Individuals around the world are often curious about how and when the U.S. Supreme Court hears tax cases. In some countries, tax cases represent the majority or large percentage of total cases heard by their Supreme Court (e.g., Mexico).

The 2013 term was unusual in that the Supreme Court heard three federal tax cases (U.S. v. Woods, U.S. v. Quality Stores, Inc. and U.S. v. Clarke). Similarly, in 2015 the Supreme Court issued opinions in three tax cases (although each dealt with powers of states to impose taxation – Alabama Dept. of Revenue v. CSX Transportation, Inc. a property tax case; Direct Marketing Association v. Brohl a sales tax case; and, Maryland v. Wynne an income tax case).

None of these cases or any Supreme Court case before them has dealt with the U.S. “exit tax” arising out of IRC Sections 877, 877A, 2801, et. seq. Indeed, to date, there have been few cases heard by other courts regarding these provisions. One of the most important and relevant is the Topsnik v. Comm’r (146 T.C. No. 1) case published this year. The Topsnik case will be discussed in more detail in a later post. The short version is that the taxpayer in Topsnik lost the case and was found to have been a “covered expatriate” with the consequent adverse tax consequences that follow.

Taxpayers have a right of appeal from the U.S. Tax Court. If a case is appealed from the U.S. Tax Court, e.g., Topsnik or another federal court (e.g., from Court of Federal Claims) it will go to one of 13 appellate courts. An appeal from one of these 13 appellate courts will lie with the U.S. Supreme Court.

The U.S. Supreme Court is generally not obliged to review cases (per the Certiori Act of 1925), including tax cases, and will rarely take up a tax case, whether or not it addresses a Constitutional question. Hence, a case like Topsnik will almost certainly never become binding precedent to all the courts in the land, e.g., the Court of Federal Claims.